Brussels – A restructuring of Greece’s debt or a second bailout from the European Union and the International Monetary Fund coupled with austerity measures and structural reforms will not be enough to ensure the country’s long-term economic future, according to the chief economist at a leading Brussels think-tank who is urging the EU to generate greater investment in the debt-ridden country.
“The key here is to create a positive economic and political future,” Fabian Zuleeg of the European Policy Centre told Kathimerini English Edition. “It is abundantly clear now that simple austerity measures are not enough: they are not going to lead the Greek economy to a higher growth path. If we want to give economic and monetary union a long-term perspective than we need to find vehicles to channel investment from the stronger countries to the weaker countries: true investment, not a transfer – something that will give returns.”
A year after receiving its first tranche of a 110-billion-euro bailout package, Greece has far from resolved its economic problems. The pace of deficit reduction has slowed, despite modest growth in the first quarter this year the recession is still biting, unemployment has risen to above 15 percent and business sentiment has evaporated. To compound the misery, it now appears that Greece might have to restructure its debt and seek anywhere between 60 and 100 billion euros in emergency loans to make up for revenue shortfalls.
It has prompted some economists to argue it is time to accept that the stringent austerity measures and sudden public spending cuts attached to the bailout were the wrong recipe for Greece. Zuleeg, who believes Greece will soon need new loans but only after restructuring its debt, argues the EU must accept its mistake over the initial bailout and look to rectify it as soon as possible.
“It was almost inevitable that in the short-term there would have been a negative effect on the economy but where Europe has failed is to give Greece a perspective on where medium- or long-term growth is going to come from,” he says. “Greek people could live with the austerity measures for a few years but it is not a politically feasible option to tell them they are going to live like this for decades. We should have protected the expenditure aimed at future investment; we should have protected the kind of things that can help Greece grow again in the medium-term. “
In a commentary published in the Brussels press last week, Zuleeg and co-author Janis Emmanouilidis, EPC’s senior policy analyst, put forward their proposal for a “new deal” to save the euro, and possibly Greece in the process. Their basic argument is that as long as Europe’s core continues to prop up its periphery through loans rather than developing initiatives to foster growth, there can be no long-term stability or progress.
Zuleeg and Emmanouilidis propose five tools to encourage growth so the EU can avoid becoming the “transfer union” that countries like France and Germany dread.
They call for debt-ridden countries like Greece to push through reforms in administration and the labor market; for productive investment sectors, such as education, to be exempted from austerity programs; for a reallocation of the EU budget with less focus on gross domestic product and more on combating the crisis and reducing imbalances; for the establishment of a dedicated fund – a new Stability and Growth Fund – to drive investments in countries that cannot afford them; and to increase the use of new loan instruments, such as project bonds, with the help of the new fund, the European Investment Bank and the European Bank for Reconstruction and Development.
“We propose a Stability and Growth Fund that is capable of investing in productive capacity and in infrastructure in areas where there is a need to modernize,” Zuleeg told Kathimerini English Edition. “This would come from a combination of structural funds, cohesion money together with any profit that is made on the loans that are given to Greece at the moment. Along with private-public partnerships this could be a substantive form of investment.”
Zuleeg and Emmouilidis’s “New Deal” is in the same spirit as existing proposals that have called for the EU to issue project bonds for Greece, which would allow investors to put their money into specific infrastructure projects, as a way of stimulating the economy. So, what is keeping the EU from considering investment initiatives rather than just providing loans to support Greece?
“From an economic perspective, there are conditions that need to be put in place,” says Zuleeg. “We would need an agreement at a European level but there is a need for the countries we are talking about [such as Greece] to ensure that their administrative systems, their reporting systems, their financial systems are able to use this money effectively because we know that in the past [EU] money has flowed into these economies and has not always been used effectively.”
Greece has a poor record of absorbing EU funds and keeping track of where the money has gone but it has reformed its statistics service and the Hellenic Statistical Authority (ELSTAT) has been given the thumbs up by Brussels. But even if Athens is able to convince its European partners of its efficiency and transparency, there is another, possibly tougher, hurdle to overcome.
“The main obstacle is political,” says the EPC’s chief economist. “People are increasingly unwilling to see further transfers of funds to the weaker economies in Europe. This is partially down to domestic public opinion and to political attitudes in some countries.”
However, one only needs to look at the major transformations in the EU over the last 18 months, largely driven by the Greek debt crisis, to see that there is a capacity for change within the Union. The question is whether leaders in countries such as Germany or in central European and Nordic states, where there is a growing opposition to bailouts, still have enough political capital to drive more reforms.
“We are in a period of unprecedented change and things are being done that a few months ago nobody would have imagined, such as the European Stability Mechanism with an effective lending capacity of 500 billion euros or discussions about a treaty change at the EU level to enable bailouts,” says Zuleeg. “Economic developments are to some extent driving political developments, so while there is little appetite for that type of [New Deal] solution at the moment, it will become increasingly clear that it’s needed.
“Then, it comes down to a big political question: At what point in time do the politicians in the stronger member states go to their electorates and explain why they’re doing this and why this is in everyone’s interests. Otherwise, we go down another route, which is the disintegration of the eurozone.”
The recent rumors of Greece possibly quitting the euro have already led to some wild scenarios about the future of the eurozone. Although reports of the euro’s demise are premature, Zuleeg fears that Greece’s presence in the single currency is far from certain.
“There is a problem now because there is a narrative developing in some countries, especially Germany, which says that Greece can just leave,” he says. “It is clear that Greece will require some form of new money and that some form of restructuring will have to take place to address the overall burden of debt. That means that there will be new demands on the table and there is a realistic option that Greece will not go along with those demands, which will lead to the Greek government running out of options. If we reach the limit of what can be done, then exiting the eurozone becomes a possibility.”
There are those – such as Mark Weisbrot, the co-director of the Center for Economic and Policy Research, in an article in the New York Times this week – who argue that ditching the euro might be the remedy Greece needs because it would allow the country to wipe the slate clean to some extent. But Zuleeg warns that it is a path fraught with dangers.
“I very much doubt Greece would benefit from leaving the euro. It would have to be accompanied by a default because there is no way the government can pay the debt on its own,” he said.
“The implication is that the new Greek currency would be a junk currency. There would be nobody in the world who would want to hold this currency including Greeks themselves. There would be no one from whom the Greek government could borrow. It would have to make further cuts to expenditure, revenues would dry up, you’d have capital flight out of the country and there would be political and social implications.”